How an Economy Grows and Why It Crashes

H O W   A N   E C O N O M Y   G R O W S   A N D   W H Y   I T   C R A S H E S
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In this scenario, Baker and Charlie would be able to 
catch two fi sh per day with their new nets. After paying 
Able their half fi sh rent per day, they would still have one 
and a half fi sh per day each. That’s 50 percent more than 
they would have had with no nets. It’s a win-win. 
Although intriguing, Able noticed some fl aws in his 
logic. Baker and Charlie might rent the nets for two days …
then use their savings to build nets for themselves. In such a 
scenario he would be only two fi sh ahead … that’s a real risk!
4.  He could lend out his two fi sh to Baker and Charlie and 
charge them 100 percent interest. In 
this scenario, he’d get four fi sh 
back if they paid him back in 
full with interest. But, there 
was always a risk that they’d 
stiff him. 
Decisions … decisions … decisions! 
To summarize, Able (and society) can do only fi ve things with 
savings:
1.  He can save what he has saved.
2.  He can consume what he has saved.
3.  He can lend out what he has saved.
4.  He can invest what he has saved.
5.  He can try a combination of the other four options.
Unquestionably, Able’s ultimate decision will be based on his 
own desire for risk and reward. But whatever he does, he is 
benefi ting the island economy and is imposing no burdens on 
his neighbors.

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